The pieces are falling into place for Egypt’s first Islamic bond sale, as Abdel Fattah al-Sisi’s government grapples with foreign currency reserves near the lowest in 20 months and debt to overseas oil companies.
The Arab nation’s sukuk law is likely to be ready by the start of the new fiscal year in July, according to Finance Minister Hany Kadry Dimian, who told reporters in Cairo on Thursday the government will sell dollar-denominated Shariah-compliant notes once the rules are in place. Egypt also said last week it’s preparing to issue its first conventional international bond since 2010.
Dimian’s comments are the strongest signal yet the government of al-Sisi, the former army chief elected in May after the ouster of Islamist President Mohamed Morsi, endorses Islamic finance. Egypt’s currency savings have dwindled by more than half since the 2011 uprising against Hosni Mubarak, leaving the Arab World’s most populous nation largely dependent on handouts from oil-producing Gulf Arab neighbors to keep its economy afloat.
“Given improvements in the economy, they feel there might be appetite for their paper,” Ahmed Shehada, the head of advisory and institutions in Abu Dhabi at NBAD Securities LLC, the brokerage of the biggest bank in the United Arab Emirates, said by phone on Sunday. “I’m sure they will find enough interest regionally to make it worthwhile.”
Saudi Arabia, the U.A.E., Kuwait and Oman pledged more than $12 billion at a conference this month to help Egypt’s reconstruction projects, half of them as deposits in the central bank. The $300 billion economy has been growing at near the slowest rate in two decades, according to data compiled by Bloomberg. Egypt’s foreign reserves dropped to $15.5 billion at the end of February, compared to about $33 billion four years earlier.
“The country has stabilized, they want to start implementing the projects, that’s why they’re trying to accelerate the sukuk law,” Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank Ltd., said by phone yesterday. “Receiving aid is a good thing, but increasing the self-financing of the country would be a great step for them.”
Egypt had been moving toward a sale of sukuk two years ago under Morsi, whose Muslim Brotherhood administration planned to boost the Shariah-compliant industry with an initial issue of $1 billion of notes. A sukuk law approved by the government in 2013 was never implemented. “Nobody wants to touch it,” Sherif Samy, the chairman of the Egyptian Financial Supervisory Authority, said as recently as August last year.
Egypt has hired banks including Morgan Stanley, BNP Paribas SA and Natixis SA for a $1.5 billion non-Shariah compliant bond sale, Dimian said last week.
The cash raised will be partly used to pay dues to foreign oil companies, according to Investment Minister Ashraf Salman.
The sukuk sale will probably also be used to finance “mega-projects that have been approved by the government during the investment conference” in Sharm El-Sheikh this month, Walid Hegazy, secretary general of the Egyptian Islamic Finance Association and managing partner at Hegazy Law & Associates, said by phone from Cairo on March 29. Egypt signed agreements for a total of $60 billion in investments during the summit, including $18.6 billion worth of engineering, procurement and construction system projects.
The yield on Egypt’s $1 billion of conventional notes due April 2020 dropped 21 basis points this year through Friday to 4.58 percent, according to data compiled by Bloomberg. That compares with a 19 basis-point decline in the yield of Middle East bonds on average, according to JPMorgan Chase & Co. indexes.
“You want to start building a yield curve that’s independent of the aid and support,” Shehada said. “It’s a step in the right direction.”